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September 13, 2013

Warnings of Market Crash Similar to ’87 Abound as Main Street Pain Worsens

Observers see reasons for correction as decline in labor force and increase in hunger show evidence of economywide pain

The drumbeat of warnings about an imminent market crash continues to rise in volume — which is probably only to be expected five years after the Lehman Brothers crash, during which time the market’s value has increased by more than a third of its 2008 value.

While market watchers share the same high anxiety, the reasons given often vary widely. Robert Wetzel of EconomicPolicyJournal.com interposes market valuations this summer with the summer of 1987, before the historic crash of Black Monday in October of 1987. Needless to say the charts matched up pretty closely. Wetzel’s explanation: the move from savings to consumption coinciding with a collapse in the money supply in both periods.

And apropos of that 1987 crash, Swiss investor Marc Faber, whose claim to fame is warning investors to exit the market before that event, also advocates selling out of the current market because of emerging-market upheaval, chaos in the Middle East and rising U.S. interest rates.

Portfolio manager John Hussman (right) has been expecting a market correction for some time, but recently has added the warning that the impending crash will be with us for a decade. His primary reason is that, because of quantitative easing, investors have been lax in demanding a risk premium for their equity ownership. “Once the risk premium is beaten out of stocks, there is no way out, and nothing that can be done about it. Poor subsequent returns, market losses, and the associated destruction of financial security are already baked in the cake.”

While short-term market swings do not typically coincide with broader economic news, nevertheless those long-term trends seem to be mainly negative and gaining force. The latest jobs report showed unemployment falling from 7.4% to 7.3%, resulting from an increase in 169,000 jobs.

But as many commentators have noted, the “gains” in employment appear as they do because the overall labor force keeps shrinking as people drop out of the job market. The labor participation rate moved down from 63.4% to 63.2% between July and August, meaning there are 312,000 fewer workers.

Labor force participation has steadily declined over the last several years, and the latest jobs report shows it has reached its lowest point, at 63.2%, since 1978. The rate hovered north of 67% at its apex in 2000, but it has fallen hardest since 2009.

A more street-level view of the economy reflects another distressing trend. A new Gallup survey shows the number of Americans who have lacked sufficient money to buy the food they or their family need rose to 20% in August — just shy of the 20.4% experiencing this level of distress during the heart of the global downturn in November 2008.